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By JARED SHELLY, senior editor/web editor, Risk & Insurance®

The story of a rogue trader losing more than $2 billion at UBS AG catapulted banking risk management to the forefront.

Abodoli allegedly falsified a record of an exchange trade fund, committed false accounting on an ETF and committed fraud. He's currently being held in an English jail awaiting a hearing next month.

But with such oversight and scrutiny on the banking industry -- in light of the financial crisis and past rogue traders -- how could one trader lose so much without it being noticed?

Rick Maloy Jr. chairman and CEO of Maloy Risk Services Inc. in New York said the oversight may have come because, at large banks with large trading desks, it may be hard to constantly monitor what each trader is doing.

"It's just a much bigger operation -- it's hard to manage everyone and follow what they do on a daily basis," said Maloy. "On those desks it can get real bad real fast."

Another theory is that Adoboli knew how to work the system.

"It seems like if someone really wants to get around the system or knows it well enough to play around it, it will be hard to stop," he said. "If the incentive is there on a greed basis, bad people find ways to do bad things. You can do all the due diligence you want, but it's very difficult to catch."

Jack Sylvia, partner at Mintz Levin in Boston, said that paying for performance will always provide a corrupt employee with incentive to find ways to take advantage of the system.

"You're not going to change that unless you change the model of paying people to do this type of work," said Sylvia, noting that such a change is virtually impossible.

Sylvia said that although $2 billion is a lot of money in a vacuum, it's not all that much in the grand scheme of trading. While many may wonder why traders are allowed access to such large sums of money, Sylvia suspects that bank risk managers are instead thinking about audit techniques and how Abodoli was able to hide the fact that he was losing so much.

"I'm assuming that the bank had a fairly robust compliance program in place for approving trades," he said. "It's the question of analyzing the cumulative results of these trades and if were they successful."

Although the UBS case garnered plenty of attention, Maloy said that it's unfortunate because -- as a whole -- the financial industry has been doing a good job of compliance recently.

"This one individual creating this act and doing this deed shouldn?t be an indictment of compliance processes in the financial space," said Maloy.

In the wake of this and other such events -- like the Societe Generale trader Jerome Kerviel losing $6.71 billion in 2008 -- banks will find themselves toeing a fine line -- they need to ensure rogue trading doesn't happen while at the same time not hindering their traders from trading.

The legal ramifications of the case are uncertain. It seems that client money was not lost -- if it had been, UBS could face a failure to supervise claim to cover funds lost from misconduct.

When it comes to coverage, banks likely have directors? and officers? (D&O) policies to protect their boards and other top managers against rogue traders, said Maloy. He predicts, however, that going forward, there will be "a lot of argument over whether [UBS] has coverage or not."

When asked if this incident could bring about more scrutiny of the financial industry, Maloy balked: "How much more can you have? The SEC is trying to do anything they can and are empowered do anything they can to find events like this."

September 27, 2011

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